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Equity supply in FY18 may cross record high at Rs1.5 trillion: Credit Suisse

LiveMint logoLiveMint 17-08-2017 Ami Shah

Mumbai: Supply of equity in the Indian markets in fiscal year 2018 may cross Rs1.5 trillion, logging a new high on the back of two major state-run insurers tapping the market, Credit Suisse said.

Initial public offers (IPOs) at Rs617 billion in the current fiscal year could be 35% higher than the previous peak seen in fiscal year 2008, the securities house said in a report on Wednesday.

Two state-run insurance companies—New India Assurance Co. and GIC of India—filed their draft red herring prospectus ( DRHPs) last week. Of the anticipated Rs1.5 trillion supply, Rs503 billion is already in, the report said.

Also, around 85% of the supply is expected to be in financial services and/or for the government, particularly insurance. With valuations still elevated, the list may grow, particularly with the expiry of lock-in for investors in companies that were listed last year, the report said.

The expiry of lock-in for investors in companies that were listed last year could bring in more supply and financial services dominate here too, given the strong issuances in that space in the previous year.

“As a new sector with good potential opens up, flows may pick up from current anaemic levels, even if only to match an increase in India’s weight,” Credit Suisse analysts Neelkanth Mishra and Prateek Singh said, pointing that concerns over whether supply could overwhelm the market may not be as worrisome.

However, even though it helps the fiscal balance in the economy as foreign money comes in, its impact on growth may be limited.

“This is how surplus financial savings pushing down cost of capital (high P/E (price to earnings) = low cost of equity capital) helps the economy, as companies raise funds for new investments. But with funds going to financial services/government, growth would be a second derivative,” Mishra and Singh wrote in the Credit Suisse note.

“It does, however, help the government’s fiscal balance. A pick-up in foreign inflows to participate in new listings would also help the balance of payments/reserves. This surge in activity should also help brokers, particularly as it expands the applicable market,” they added.

Some experts agreed infusion of equity in such high quantities will help the economy.

“I would think that such huge issuances there would be wealth creation in the market, and which will help the economy,” said Vikas Khemani, chief executive officer of Edelweiss Securities Ltd.

“Also, when state-run enterprises get listed, they tend to become more efficient, competitive and market focused,” added Khemani.

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